Campbell: Sir Roger Douglas, And His Orewa Speech

February 11th, 2009

Quaint. 25 years after Roger Douglas first won the power to affect this country, he has returned to Orewa, the elephant’s graveyard of politicians ( Don Brash, Winston Peters) still intent on stirring the embers of ancient grievances.

Starting with this failure of perspective :

New Zealand has been in a recession – getting poorer – since the first quarter of 2008. We were in a recession before the fallout from the global financial crisis arrived on our shores; we were in a bad economic situation, and the financial crisis has simply made that situation worse.

Yes, but the fact New Zealand was in recession before the international crisis hit does not mean the domestic recession was more fundamental – or that a global crisis has come along and “simply” made the fundamentals worse. I hate to be the one to tell Douglas the bad news, but this crisis is of a quite different scale. It is even worse than the stockmarket crash of 1987 that his policies were instrumental in fuelling last time around.

The current financial crisis is not your garden variety business cycle. Still, the starting point could have been far worse. The last nine years had seen this country’s longest sustained period of growth since the Second World War, with unemployment at twenty year lows. Belatedly, the gap between rich and poor had finally began to reduce, a trend that began even before the Working For Families properly kicked in.

We saw a serious erosion in that position during early 2008 – and on the way down, New Zealand has been hit by a crisis larger than any that the global financial system has faced since the early 1970s, at least. Most economists around the world are blaming this meltdown on the kind of unregulated free market excesses that Sir Roger has been championing for the past 25 years.

The only reason we aren’t worse off – as even Bill English has conceded – is because New Zealand entered the dual recession/crisis with exceptionally low levels of public debt. Mainly because for most of this decade, Michael Cullen paid off debt – and until last year – did not enact the sort of financially and socially irresponsible tax cuts that Sir Roger and his ilk had been clamouring for. The package of stimulatory tax cuts that began last year have now been claimed as an ingredient in the Key government’s own stimulatory package.

But back to more of Sir Roger’s verdict on the Clark administration :

In the private sector, our current account deficit has ballooned to its largest since the last major recession in 1975. This large increase in the current account deficit – now equal to 8.5 percent of GDP – occurred despite the most advantageous terms of trade since the early 1980s.

As our current account deficit grew larger, we told ourselves that a significant drop in the dollar would help eliminate it. Unfortunately for us, the drop in the dollar has been accompanied by a significant reduction in commodity prices. What does this mean? It means that, unless we make major changes to our policy settings to increase our international competitiveness, then the current account deficit is here to stay. And this deficit will require ongoing financing. But such financing is increasingly scarce because of the global credit crunch…

Frankly, being admonished by Roger Douglas about our chronic current account deficit is a bit like being lectured about road safety by a hit and run driver. Large and enduring current account deficits are one of Douglas’ enduring legacies to the nation. What, structural imbalance perchance, does it reflect ?

Could it possibly be because Douglas and Richard Prebble sold the family silver – the state assets, the banks, the telecommunications system etc for peanuts – thus fostering structural imbalances in our economic relations with the wider world that we are still suffering from today. Let us not forget the failure of nerve to enact a capital gains tax that would have curbed housing speculation, and channeled investment into the productive sector.

Douglas, in other words, helped to build the pipeline of outflows that have kept our current account deficit primed and pumped – and judging by his Orewa speech, Douglas wishes to enact more of the same, as if such policies bear no responsibility whatsoever for the current crisis in financial markets. Well, back in the real world, John Maynard Keynes ( and not Milton Friedman) offers the solutions to which major economies are now turning – and luckily for this country, Douglas has been on the sidelines for the last decade or more. Did I mention that tax cuts during this past decade’s boom times would have been wildly inflationary – and would have fuelled spending on imports and blown out the current account deficit even further than it is now ?

Back to the Douglas prescription at Orewa.

There is only one way to increase wages: increase productivity…. Despite this reality, we have unions – like the Engineering, Printing, and Manufacturing Union – publicly announcing that it will continue seeking real wage increases. Any increase that workers receive beyond productivity increases will merely exacerbate unemployment.

Righto Yet only a few lines later in the Orewa speech, we find this claim : ‘Despite slow wage growth, we have continued to live beyond our means..’ So which one it it ? Have big union driven wage hikes been out of whack with productivity, or has slow wage growth still seen us spending up large, regardless ?

Tellingly, for all his talk about our poor productivity levels, Douglas makes no criticism of the private sector for its failure to invest in the new technology crucial to productivity growth. Nor does he slam the private sector for itsfree-loading on government spending on research and development. Who failed to invest productively ? Who lavishly paid out profits in dividends during the recent boom, rather than invest in research and development? All Douglas can do on this score is rail against the Clark government for trying to offer r&d tax credits, a carrot that even his former acolytes at Treasury said in their briefs to Bill English was a good idea, and one that should not be scrapped.

In similar vein, it is ordinary citizens who cop the blame from Douglas for succumbing to household debt and easy mortgages : “With credit cheap, we mortgaged our houses to buy consumer products.’ Again, not a word of criticism about the role of banks in borrowing overseas and selling mortgages that neither the country or the would-be homeowners can sustain, while feeding the current account deficit in the process. To Douglas, only wage rises should to be tied to productivity. No such calls for restraint by CEOs, or by shareholders.

True, criticizing Douglas in 2009 is like shooting fish in a barrel. Yet the pathology of the worldview on display is fascinating. If you can believe him, the late 1990s were a virtual nirvana, rudely snatched from us by Helen Clark and Michael Cullen. To make that case, Douglas paints a rosy picture of life under Jenny Shipley that no one who actually lived through the Shipley era would recognize. Back then, he rhapsodises, tax settings were simple and good, inflation was beaten, and years of sustained growth were stretching before us. ‘Privatisation,’ Douglas exults, ‘ had created efficient businesses targeted at meeting consumer demand.’ This is sheer fantasy, and it takes only one word to dispel it : Telecom !

Talking of which, Douglas slams the Clark government for its long overdue moves to regulate and break up Telecom, and that perspective is entirely consistent with the neo-Victorian morality that runs through the entire speech. Programmes to relieve poverty you know, are only ‘incentive destroying.” On Telecom, Douglas’ views hark back to the era that pre-dates the birth of anti -trust law in 1910 – which was when even the Americans saw the need for government to intervene and regulate, and break up the market dominance held by John D. Rockefeller, and his Standard Oil company.

Looking ahead, Douglas appears to resist the very notion of a stimulus package, if it will entail deficit spending by a government during this recession:

When international credit is particularly tight, the Government has announced plans to borrow and spend on infrastructure projects. We have now been put on notice that our credit rating may be downgraded. Investors see our debt as risky – they fear we may default.

John Key and Bill English have of course, been talking for months about the tightrope that New Zealand now has to walk. We have to negotiate out way between stimulative deficit spending on one hand, and the risk that further borrowing and public indebtedness could torpedo our credit rating. And that, when seen in inconjunction with that huge current account deficit, could well trigger panic and flight among foreign investors. We have painted ourselves into a very tight corner.

Serves us right, in one respect. The tax cuts may have been a justifiable response to the domestic recession last year, but going forwards, they eave us with much less headroom now to cope with the global financial crisis. We fired some crucial ammunition against the lesser threat. While tax cuts may be a sugar fix that creates a degree of retail spending, they are a poorly directed way of fostering sustainable growth. .

Douglas is no help. His vision of further privatizations of ACC and beyond, and of having no personal income tax whatsoever (yes, that’s also in the speech) are trumpet calls from a bygone era. Later today, Key will unveil the infrastructure projects central to the government’s initial stimulus package. As they unfold, one can only hope that Douglas will continue to be ignored.